Ingenious NetApp buys Engenio

Boss gets sweet revenge on ex-employer

NetApp is buying LSI's Engenio storage business. In other words, NetApp CEO Tom Georgens is buying the business he used to run.

Georgens must feel particularly good. With Engenio, he was going to lead the company into independence from LSI, but the deal was pulled, Georgens quit and went to NetApp, reporting to then-CEO Dan Warmenhoven, and eventually replacing him when Warmenhoven went upstairs to the board.

Now Georgens gets his sweet revenge, a dish best served cold, and ends up running Engenio again and taking it out of LSI's clutches. NetApp will pay almost half a billion dollars, $480m in cash, for the operation, and the deal is expected to close in 60 days. The purchase "is expected to be accretive to NetApp’s… earnings per share by the end of the second quarter of its 2012 fiscal year."

Engenio is the external storage division of LSI Corporation, a company which, led by CEO Abhi Talwarkar, is concentrating more on chips and components for networking and storage than storage systems.

NetApop's statement said:

Engenio will enable NetApp to address emerging and fast-growing market segments such as video, including full-motion video capture and digital video surveillance, as well as high performance computing applications, such as genomics sequencing and scientific research. … These segments are expected to collectively represent a $5 billion incremental market opportunity by 2014. The Engenio acquisition will also enable NetApp to expand its market reach with a mature OEM business that will further diversify its channels to market, especially in markets it currently doesn’t address, such as server-attached and embedded storage.

This is NetApp's first major foray into storage arrays that do not run its ONTAP operating system, which all its FAS arrays do.

"With Engenio we will have a strategic storage platform to capitalise on new, high growth opportunities that we don't currently reach with our FAS platform," Georgens said. "NetApp also gains a proven OEM-based revenue stream that is run by a talented Engenio team."

Talwarkar said: "The [NetApp Engenio] combination should further advance the Engenio storage platform, as well as augment the OEM channels that have been the foundation of its longstanding success."

For LSI the $480m will be welcome. Its latest results for its fourth fiscal 2010 quarter, ending January 31 this year, showed a loss due to restructuring charges, probably related to LSI closing down its SVM storage virtualisation software business that had HP as its sole customer.

In the results earnings call Talwarkar compared Engenio arrays to those from 3PAR and Isilon:

What I can say relative to the businesses and how they're different, first of all, we will serve the same end market, which is data storage and data protection. However, we serve a lot of different segments.

3PAR is more higher end, Isilon is more clustered to large scale-out file. We're more of general-purpose block storage. Now our business models vary dramatically. We are a OEM business. In that way, we sell our building blocks to many, many OEMs around the world that are unbranded. And as a result, our margins are in the 30s, as we've talked about before. And we don't have a direct sales force that touches on customers. So they are different in many ways. We solve some of the same problem for end customers, but very different in terms of business model."

At first glance the Engenio OEM business is the deal. But can NetApp keep Engenio's existing customers? For example, will Oracle, that disliker of OEM supply deals, continue to use Engenio 7900 arrays as the source for its 6580 product, now they are being supplied by Oracle storage competitor NetApp? Will IBM continue to base its DS5000 arrays on Engenio hardware? That's probably okay as IBM sources its N Series arrays from NetApp. Will Dell keep on taking Engenio storage?